A Reasonable Disagreement on Revenues Shouldn’t Mean Underinvesting in Our State’s Future

To no one’s surprise, this year’s budget deliberations between the Governor and the Legislature are almost as much a debate about revenues as about specific policies. Underlying the differences in how the Governor and lawmakers view this budget is a disagreement about how much revenue California can expect in state fiscal year 2015-16, which begins this coming July 1. The Governor’s Department of Finance (DOF) projects the state will receive about $3 billion less than what is projected by the nonpartisan Legislative Analyst’s Office (LAO). The Legislature adopted the LAO’s higher revenue projection as part of its 2015-16 budget package — which was approved yesterday — setting the stage for some tough negotiations with the Governor.

But let’s not jump to the conclusion that just because the LAO’s revenue projection is higher than the Governor’s, it is somehow riskier or less likely to be accurate. The LAO’s projection is based on a scenario that assumes “moderate economic growth and slow growth in stock prices over the next few years.” Moreover, along with higher revenues come commensurately higher contributions to the Budget Stabilization Account (BSA) — the state’s rainy day fund — and increased debt payments as required by Proposition 2, which California voters approved last November. Under the Legislature’s 2015-16 spending plan, the state will pay down an additional $760 million in budgetary debt and deposit an additional $760 million in the BSA.

Naturally, Californians expect policymakers’ decisions to be based on as accurate a picture of the future as possible. While acting conservatively solely in an effort to prevent the need for tough decisions down the road may seem like a safe option, it’s not a wise course of action. This is especially true when you consider the public goals that a budget is intended to achieve, such as keeping our children healthy and building a strong workforce, both of which require early investments that pay off later. Furthermore, it is exactly these services and supports that are most likely to be cut further in the event of a future economic downturn, even if they haven’t been restored or expanded in good times. To take the Governor’s line of argument to its ultimate conclusion, the safest approach would be to simply not invest in public systems and services at all, since such spending will only have to be cut if revenues ever come up short. What we should be asking ourselves is what kind of state we want to live in, and what we need to do to get there.

Of course, it’s good policy to build budgets with an eye toward future risks — that’s what the rainy day fund is for, and what Proposition 2 requires policymakers to do with higher revenues. But budgets also need to be built with an eye toward investing in Californians’ future. The new state Earned Income Tax Credit (EITC) proposed by the Governor and approved by the Legislature is a significant step in this direction. But if reasonable projections tell us we have room in our budget to reinvest more in vital services, such as the still diminished supports for California’s early learners, then we’re undermining our future prosperity by sitting on our hands.

Let’s be clear: no projection is ever perfect. Both the DOF’s and the LAO’s projections have historically proven to be reasonable. However, in recent years the LAO’s projections have been closer to actual revenues collected.  The Legislature’s choice to base their budget on the LAO’s projections — along with the higher saving and debt repayment that comes with it — is reasonable as well.

— William Chen